Month: January 2017

In last week’s episode of Aggregation Wars, we covered the big banks’ lobbying effort to stop aggregation. This week, we profile the fintech companies who are fighting for aggregation and for the consumer’s right to access their financial data.

FinTech companies are forming an opposition party in the battle over aggregation. Some are familiar, and others are behind-the-scenes. Here’s who’s defending your data ownership:

The Companies You Know

Mint, Acorns, Digit, Kabbage, Betterment. These fintech companies offer direct-to-consumer financial products like robo-advised brokerage accounts, automated savings tools, and loan-refinancing platforms. Some of these companies are financial institutions of their own while others, like Digit, are not. None of them compete directly with banks, but all of them require access to your banking data. For example, Digit analyzes your spending habits to help you save for custom goals like a vacation. Without open access to customer banking data, these tools could not exist.

The Companies Backstage

Behind each of these shiny new apps, there is a network of technology providers who build “pipes” that connect to financial institutions: Yodlee, Plaid, Quovo, Intuit. Without stable, secure API connections to the big banks, these aggregation technology providers are stuck using more primitive (and less secure) screen-scraping technologies to grab user data. Clearly, these companies want open access to consumer financial information.

Joining Forces

The FinTechs you know and the ones you don’t are joining forces to fight for consumer data access. This month, they formed the CFDR, or the Consumer Financial Data Rights Group. The group’s goal is to convince the CFPB that secure data access is a win for all parties: FinTechs, banks, and consumers. More broadly, the group supports collaboration between banks, regulators, and FinTechs that will help them align around common goals: building a secure financial ecosystem that benefits and protects the consumer.

While “FinTech” might yield visions of nimble, garage-style startups, there is big money behind these growing companies: global FinTech investment reached $22 Billion in 2016, and that’s from Venture Capital alone. Still, it’s nothing compared to the deep pockets of the big banks. Hopefully, the CFPB will realize the potential of free-market competition for financial products, and the FinTech Industry’s suggestions will be received well.

What’s next?

The CFPB will continue to accept letters while it weighs the pros and cons of open access to financial data. As you read this, the ABA is working to discourage aggregation practices, and the FinTech-backed CFDR is working to improve them. You have until February 14th to contribute.

Next Up: Europe and Beyond

In the next installment of Aggregation Wars, we look take a look at the open API initiatives in Europe, The UK, Singapore. If the US is to remain competitive on the global fintech front, we will need to catch up to these countries with consumer-first regulations that encourage innovation, put security first, and lay the tracks for a more inclusive, consumer-friendly financial services architecture.

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This week, the battle over consumer financial data continues, with Chase offering tech companies a more secure way to access their systems and more similar deals likely to come throughout the year. However, without an agreed-upon protocol, these deals won’t be enough to protect consumers.

This week, JP Morgan Chase and Intuit announced a partnership that will give Chase customers access to Mint, TurboTax, and other financial tools, without requiring the customer to share login information with Intuit.

After the JPMorgan-Intuit deal, consumer advocates praised the bank’s CEO for offering a more secure option for JPM clients. But these deals are not enough – the industry still needs to set standards and best practices for all banks to give access to all digital tools. This will put a faster end to screen-scraping and benefit the consumer most.

Investors prefer passively-managed funds, Vanguard is dominating inflows, and most of the money is going into dirt-cheap ETFs. Millennials love ETFs, and the traditional mutual fund players are struggling to grow their own successful ETFs. All of this is bad news for the old-school securities industry, which relies on charging 1-2% of assets in annual fees.

Before the internet, the average investor didn’t have the tools to know if their portfolio was underperforming the benchmark. This shift in access to information has made it harder for actively managed funds to justify high fees – one of the factors leading to the ETF price war that is currently underway.

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The Pandora’s Box of customer banking data has already burst open with the popularity of third-party financial products. Still, banks are doing all they can to restrict their customers from accessing their own data. What gives?

Aggregation has become a flashpoint between hundred year old banks, the CFPB and customers. In the first installment of this series, we looked at the history of aggregation technology, and its improvements since the first dot-com boom. This post explores the banking industry’s opposition to aggregation, and provides a path forward for US regulators.

New Enemy, Same Tactics

This year, the American Banking Association came out against aggregation technology, citing the same concerns and scare tactics they have relied on for twenty years. Today, aggregation technology is exponentially more reliable and secure than it was in the late 1990s. While the enemy has evolved, the banks are still using the same plan of attack.

In 2001, the OCC issued a “Guidance Memo” to banks that listed five risks posed by aggregation:

Strategic Risk

Reputation Risk

Transaction Risk

Compliance Risk

Security Risk

Since then, several of these concerns have been made obsolete by technological advancements. Others proved to be illegitimate in the first place. Regardless, the ABA’s latest arguments revolve around the same old concerns of “data usage” and “security.” In his 2015 shareholder letter, Jamie Dimon dedicated significant air time to criticize aggregators, and took direct action by cutting off JP Morgan’s customers from using Mint.com. While the security concerns are exaggerated, the rising popularity of PFM tools means that they are racking up significant server costs for the banks. In other words, JP Morgan doesn’t want to pay to import its customers’ data to Mint.com.

Enter the Regulators

The CFPB is a government watchdog set up to “make consumer financial markets work for consumers.” In November 2016, they held a field hearing in Utah to spark a public debate over aggregation. While the hearing made room for a healthy debate, it has opened the floodgates to banking industry lobbyists and the influential American Bankers Association, which continues to fight against aggregation.

If the CFPB plans to keep their promise to protect consumers, they should weigh popular consumer opinion against the lobbying effort of the big banks. In 2016, over 70% of customers trust the top tech companies more than their banks. A fair ruling will incorporate changing user behaviors and advancing technologies into its decision. Got an opinion? You can submit letters to the CFPB by February 14th, 2017.

Towards a Working Regulatory Framework

As it moves towards establishing new laws, the CFPB should stick to principles-based best practices that will remain relevant as the technology, and the debate over data ownership, continue to evolve. In particular, the industry will benefit from guidance around:

API Framework: Financial Institutions should identify 1-3 “Approved Vendors” to build and manage their APIs. The financial sector can trim inefficiencies using a standardized protocol for data, just as the healthcare sector has over the past ten years.

Customer Control Center: It must be easy for consumers to manage where their data is flowing. Banks should be required to provide a clear dashboard of all third-parties who are plugged in. This way, consumers can unlink their accounts from products they no longer use, keeping their data under control.

Re-examine OFX: As we mentioned in the first in this series, Intuit and Microsoft developed the OFX to avoid the Aggregation Wars. Is now the time to re-examine a protocol that banks can support for distribution?

In our next installment of this series, we will take a closer look at the European regulations, and the lessons the US can learn looking forward.

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Twenty years after the birth of the internet, aggregation remains a hot topic in financial services. Today, aggregation enables consumers to access all of their accounts in one portal, while also serving as a valuable data collector for financial institutions. In Europe, where regulators have supported aggregation, banks are learning to use it as a revenue-gathering vehicle. In the US, banks are still flip-flopping over whether or not they support the use of aggregation. As the battle continues to play out, we expect aggregation to play a key role in helping financial institutions, and associated technology providers, focus on what is best for the consumer.

This post marks the first of a 4 part series on aggregation:

Near History

Current Aggregation Wars

Europe, Data and Confusion in the US FI Sector

Putting the Customer First

Part 1: Near History

In 1997, Microsoft & Intuit created secure protocols for transmitting personal financial data, called OFX, in collaboration with Checkfree. Both companies had a vested interest in this technology: they were building their own personal financial management software (PFM). At the time, however, financial institutions balked at the new technology, preferring to keep a tight stronghold on their customers’ financial data.

Around the first dot com boom, there were a growing number of venture backed aggregation services such as CashEdge, Yodlee, Teknowledge, and Vertical One. These services allowed consumers to access their financial information on PFM sites without having an “official relationship” with the financial institutions. This was a major win for the consumer, who could now manage all of their accounts in one place thanks to the early movers of PFM services: Intuit, Microsoft, and Yahoo! Finance.

During this time, some of the major banks joined the PFM “race” by building their own portals to aggregate customer accounts from other financial institutions. In the final part of this series, we will share a comprehensive review of the products & services services offered by banks for PFM- let’s just say you should get your magnifying glasses ready if you want to find the services or read the fonts.

In 2006, at the dawn of Web 2.0, Mint.com disrupted the software vanguard, Intuit, with an online service that Intuit later acquired in 2009. Founded on the premise that Intuit’s service was sub-optimal, Mint leveraged Yodlee for aggregation and offered a graphically rich and engaging PFM experience that also incorporated best practices of contact management to engage customers (something that continues to be the challenge with the “liability” side of PFM. Finally, the value of aggregation started making sense to the consumer.

Through the last ten years, since the advent of Mint.com, account aggregation has discovered countless new use cases, from PFM to providing data for banks, advertisers, hedge funds and wealth managers. Despite using aggregation for their own purposes, banks have surfaced a rotating set of objections to aggregation, citing security concerns, owning their customers, and data costs. We will elaborate on these contradictory objections in Aggregation Wars.

Over this period, the industry has seen oscillating phases of growth and consolidation. Notably, Yodlee bought VerticalOne right out of the gate in 2001; CashEdge sold to FiServ in 2011 for a rumored $465MM; Teknowledge filed for bankruptcy in 2013; ByAllAccounts sold to Morningstar for ~ $30MM in 2014; and Yodlee sold to Envestnet for $590MM in 2015. Some of these companies, like CashEdge, built popular consumer-facing products, while others, like ByAllAccounts, reached widespread adoption by wealth managers. With so many different use cases, it’s clear that aggregation technology is no one-trick-pony.

Most recently, two new entrants have been eroding incumbent market share with “newer” technology. Quovo and Plaid have managed the banks’ objections and provided clearer value propositions to the mobile developer community. Quovo’s focus on wealth management and Plaid’s “instant funding” product show that there is still plenty of room for innovation and growth of aggregation technologies.

By March 11th, the SEC will either approve or reject the Winklevoss Bitcoin ETF. Since the IRS classifies Bitcoin as a commodity, rather than a currency, the fund manager would have to purchase bitcoins as investor money poured into their ETF, driving up its price. While analysts don’t expect the ETF to have a long-term impact on bitcoin’s price, it would still help remove mainstream stigma around cryptocurrencies.

While fintech entrepreneurs in most cities are betting against the big banks, their counterparts in Singapore are trying to strengthen them with fintech collaboration. The Monetary Authority of Singapore (MAS) announced a $158 Million investment in fintech, and most of the money will go to “enabler” fintechs, rather than disrupters.

Another round of 2017 predictions for the fintech industry. As financial institutions’ stocks have rallied 20% since November, they will use 2017 to leverage this market cap to acquire more startups. IPO candidates: Stripe, SoFi, Credit Karma? Banks will start creating AI labs as it becomes the new buzzword, but no real use cases will emerge until years later.

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Taco Bell and McDonald’s aren’t the only companies chasing the dollar menu audience. The major financial institutions are in a price war, cutting their ETF expense ratios in a back-and-forth which has led to the steepest decline in fees since the online brokerage was invented during the first dot-com boom.

These are the three forces driving the ETF price war:

1. The Walmart Effect

The three largest ETF issuers (State Street, BlackRock, and Vanguard,) control a staggering 84% of the $3 Trillion dollar market. Vanguard has used a client-owned corporate structure, paired with massive scale, to cut fees and grow assets for decades. However, it has traditionally focused on core ETF offerings that track indices, rather than sector-oriented products like Cybersecurity ETFs.

Recently, Vanguard has started expanding into more sector-oriented products, like international dividend or country-specific ETFs. These types of investments were previously dominated by smaller funds with higher expense ratios. However, as a recent Bloomberg article revealed, Vanguard’s entry has put downward pressure on smaller issuers’ prices, like Walmart opening up next to a mom-and-pop store.

2. Explosive Asset Growth

In the last three years, ETFs have seen record-high inflows as more investors shy away from high-fee and actively-managed products. Today, ETF assets under management stand at $3 trillion, a 430% increase since 2006, and this growth is only expected to continue. In fact, the market is expected to reach $10 trillion in assets by 2020.

At the same time, mutual funds have seen massive outflows as investors opt-out of their high fees and tax inefficiencies. While the ETF AUM has grown 430% since 2006, mutual fund assets have only grown by about 50%, and are expected to stop growing this year.

The expanding industry has issuers rushing to cut fees in hope of soaking up as much ETF market share as possible during this phase of rapid growth.

3. The Fiduciary Rule

Traditionally, ETF issuers used financial advisors as a sales funnel to retail clients. In this scenario, the financial advisor would develop a relationship with an ETF issuer, say BlackRock, and gain a thorough understanding of the products they offer, their structure, and their purpose in a client’s portfolio. Now, suppose the client asks for exposure to high-yield bonds. Their advisor would be more likely to recommend BlackRock’s $HYG, rather than Vanguard’s $VCLT which they know nothing about.

As a result of the sales funnel, the client often ended up purchasing ETFs from whichever issuer was most familiar to their financial advisor, regardless of the expense ratios. For mutual fund investors, the value chain was even more congested. “Soft dollar” arrangements allowed fund managers to artificially reduce their expense ratios by paying for services with order flow. As a result, many investors were paying hidden, undisclosed fees which ate into their returns.

Luckily for investors, this kickback scheme sparked an outrage that resulted in new regulation nicknamed “the fiduciary rule.” The fiduciary rule requires financial advisors to act in the best interest of their client at all times. In short, the fiduciary rule requires financial advisors to suggest low-fee products, and ETF issuers are dropping their fees in order to keep the advisor sales funnel alive.

Thanks to consumer-friendly regulations, an expanding industry, and the Walmart effect, the ETF price war is saving investors billions of dollars as the fees on their investments continue dropping towards zero.

Banks are moving past the simple robo-advisor in favor of more sophisticated models, which use artificial intelligence to scan market data and world events, identify new trends and use their knowledge to beat the markets when trading.

Earlier this week, Bitcoin prices reached all-time highs around $1,100. Since Wednesday, they’ve come crashing back down to the $900 range, representing a 20% loss. What caused the rally and subsequent decline? A large part of Bitcoin’s price is driven by China’s currency controls; when Chinese citizens expect a currency devaluation, they buy Bitcoin, then swap it back into other currencies. This week, the Yuan surprised Chinese citizens by strengthening, which brought Bitcoin’s price down.

While Bitcoin has historically been volatile, its usage as a currency is much higher than it was in 2013, when the price dropped 50% overnight. Because of this, the decline in price was much less dramatic this time around.